New Zealand Foreign Trusts and the Unaoil Scandal: More Chickens Coming Home to Roost, and They’re Big

NZG may well be wishing they’d not just ignored early warnings of the scandal to come, back in 2012. The chickens, in the form of 11,000 NZ foreign trusts, are simply going to keep coming home to roost now.  There is going to be a large and noisy mess.

Naked Capitalism, March 18, 2016

Well, the next instalment of the large and noisy mess didn’t take very long to turn up. New Zealand Foreign Trusts, implicated last month in sleazy-looking machinations by Maltese Ministers, have now hit the big time as vehicles for corrupt international money flows.

This Wednesday, Fairfax Media and Huffington Post jointly broke the story of Unaoil. “The Company That Bribed the World”. From Fairfax outlet The Age:

A massive leak of confidential documents has for the first time exposed the true extent of corruption within the oil industry, implicating dozens of leading companies, bureaucrats and politicians in a sophisticated global web of bribery and graft.

After a six-month investigation across two continents, Fairfax Media and The Huffington Post can reveal that billions of dollars of government contracts were awarded as the direct result of bribes paid on behalf of firms including British icon Rolls-Royce, US giant Halliburton, Australia’s Leighton Holdings and Korean heavyweights Samsung and Hyundai.

The investigation centres on a Monaco company called Unaoil, run by the jet-setting Ahsani clan. Following a coded ad in a French newspaper, a series of clandestine meetings and midnight phone calls led to our reporters obtaining hundreds of thousands of the Ahsanis’ leaked emails and documents.

Huffpo elaborates on the scope of the operation:

Hundreds of major international corporations…counted on Unaoil to secure lucrative contracts in Iraq, Kazakhstan, Libya, Syria, Tunisia, and other countries in Africa, the Middle East, and the former Soviet Union, tens of thousands of internal emails and documents reveal. It’s common for large multinational corporations to partner with smaller firms with local expertise to win contracts. But in many cases, Unaoil wasn’t winning contracts because of its expertise — it was winning them by paying millions of dollars in bribes to corrupt officials.

…on the MO:

The Unaoil emails don’t show corrupt third-world kleptocracies shaking down helpless Western corporations. They show the opposite: Unaoil, working for Western companies, is seen slowly corrupting foreign officials, starting off with small gifts and shopping sprees and eventually hooking them on major graft.

…

Here’s how Unaoil’s schemes often worked. During the time frame covered by the documents — most of which date from the end of 2003 to the middle of 2011 — Unaoil’s practice was to ask its partners for a percentage of the revenue from any contracts Unaoil helped them win. Once Unaoil made sure it had a stake in its client’s business, it would sometimes use a portion of its cut to bribe government officials — and keep the rest for itself.

…and on the apocalyptic ultimate consequences:

By aiding the corruption of already-distrusted regimes and accelerating the flow of money and resources out of poor countries, Unaoil and its partners were risking far more than fines and criminal penalties. They were creating political instability, turning citizens against their governments, and fueling the rage that would erupt during the Arab Spring — and be exploited by terrorist groups like al Qaeda and the Islamic State.

How do New Zealand Foreign Trusts fit into this picture? Stuff.co.nz, another Fairfax Media outlet, has the dope:

A Fairfax Media investigation of Unaoil obtained a document which shows the “wiring diagram” for the network of Unaoil entities through which giant multi-national companies channelled bribes to corrupt officials in oil-producing countries including Iran, Iraq and Libya.

…

The wiring diagram appears to show Unaoil is owned by UNA Energy Group Holding of Singapore, and that in turn is owned by UnaEnergy Trustees based in Auckland.

But the Auckland company is just a link in the chain, and it is owned in turn by Fleetwood Trustees, based in the tax haven of St Kitts and Nevis.

The Auckland company has three directors, but two at least appear to be trusts specialists who make a living providing professional services to others.

…

The Auckland company’s only New Zealand-based director is Richard Gordon Wilson, who is an foreign trusts expert from Jackson Russell Lawyers, a Shortland Street law firm.

Wilson said: “UnaEnergy Trustees Limited is a trustee of a trust established for UNA Energy, and holds the shares in a holding company based in Singapore”.

“We just act on instructions from an outfit in Monaco which runs family offices for wealthy clients,” Wilson said.

That organisation was Rosemont, for which Jackson Russell sets up New Zealand trust arrangements.

“They are a very reputable organisation of English professionals,” Wilson said.

Back in 2013, the NZ Greens tried to raise a stink about the opacity of NZ Foreign Trusts, which was already making IRD, New Zealand’s Inland Revenue service, very uneasy. Reform languished, though. In late 2014, the New Zealand Herald ran a piece entitled Foreign trusts in IRD sights:

Although the reports note much of the efforts in this area will follow the lead of OECD’s Base Erosion and Profit Shifting (BEPS) work programme, it also details areas where New Zealand could act to unilaterally improve its international tax settings. That included a review of the taxation of foreign trusts.

IRD says it intends reporting to Revenue Minister Todd McClay on that issue before the end of the year and will release consultation documents in mid-2015.

New Zealand-based “foreign trusts” have been actively marketed overseas for benefits including their exemption from New Zealand tax on foreign sourced income, minimal compliance and reporting requirements, and no requirement for public disclosure of the beneficial owners.

You can see why the likes of Unaoil quite like New Zealand Foreign Trusts…

Anyway the mid-2015 initiative sounds quite promising, but, observing that the promised consultation didn’t seem to have materialised by March 2016, this blogger checked with the IRD, who said:

To clarify one point – the New Zealand Herald article suggests that a mid-2015 consultation was planned for foreign trusts.  However, this is not quite accurate.  The New Zealand Herald article used as its source material two reports from Inland Revenue. In the report of 14 November 2014 titled “Timeline for BEPS-related tax policy work”, Inland Revenue indicated that it would report to Ministers on foreign trusts at the end of 2014.  The proposed mid-2015 consultation that was referred to in the report did not relate to foreign trusts, but instead to proposals intended to strengthen New Zealand’s non-resident withholding tax rules and administrative measures to improve the quality and usefulness of tax information.

In relation to the foreign trust tax rules, given wider Government priorities the Government will not be considering regulatory reform of the rules at this stage.

That said, however, the Government has an ongoing responsibility to consider whether its regulatory settings are facilitating inappropriate behaviour in other jurisdictions.  It is possible that, in the future, this responsibility may require a review of the regulatory requirements applying to different types of investment or business vehicles available under New Zealand law.

Well, the giant Unaoil scandal certainly does look a bit like “inappropriate behaviour in other jurisdictions”. Perhaps NZ Foreign Trust reform is rocketing up the Governmental agenda as I write this. There are onlookers, after all: let’s go back to HuffPo for one potentially interested and influential party:

Bribery is illegal for a litany of reasons, but one in particular — the idea that corruption fuels political instability and strengthens the enemies of free-market democracies — has underpinned U.S. anti-bribery efforts for decades. When the U.S. passed the FCPA in 1977, “the concern was that U.S. companies paying bribes overseas was going to weaken the position of the west in the Cold War,” said Spalding, the Richmond law professor. Corruption, U.S. lawmakers realized, weakens Western-friendly governments and makes them easy targets for insurgencies.

…

The Obama administration has belatedly acknowledged the idea that corruption is a national security threat. “Corruption is a radicalizer because it destroys faith in legitimate authority,” Secretary of State John Kerry said at the World Economic Forum in Davos earlier this year, singling out Iraq, Syria, Libya and Nigeria as examples. “It opens up a vacuum which allows the predators to move in. And no one knows that better than the violent extremist groups, who regularly use corruption as a recruitment tool.”

Perhaps the US State Department will be having a little word with the New Zealand Government sometime soon about New Zealand Foreign Trusts, at least if Hillary Clinton’s out of the loop: she wasn’t a particular fan of anti-corruption initiatives in Afghanistan:

Sarah Chayes witnessed the damage that flood of Western money — and the accompanying corruption — did in Afghanistan. When U.S. forces entered Kabul to oust the Taliban, Chayes was a reporter, covering the invasion for National Public Radio. She decided to stay and help rebuild, eventually opening a cooperative that produced soaps and body oils. She was one of very few Americans over the last 15 years who lived and worked with the Afghan people rather than behind the razor wire.

After just a few months, Chayes noticed people she thought of as moderate, normal folks expressing sympathy for the Taliban. She soon realized what was happening: the corruption that had been rampant at all levels since the U.S. invasion was fueling anger and unrest.

Chayes later began working for the U.S. military in Afghanistan, waging an internal war to persuade policymakers to focus on corruption. The issue ultimately reached the desk of Secretary of State Hillary Clinton, who largely dismissed it in a 2010 memo that remains classified.

Fairfax and Huffpo promise more blockbuster articles. They’ll be worth looking out for. In the mean time, I commend their coverage so far to readers: just Google Unaoil. I can’t imagine that the rest of the media, observed today by Yves to be ignoring this story so far, can possibly neglect it for much longer: but we shall see.